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These 6 States Tax You the Least

Anywhere you go in the U.S., you'll still have to pay taxes. But choosing low-tax states to live in can free you from your tax burden a lot faster than in other parts of the country.

The nonprofit Tax Foundation created Tax Freedom Day as a way of easily comparing the relative amount of taxes that people pay to federal, state, and local revenue agencies. You can do the same simply by taking the total you pay in tax and dividing it by your income, telling you what percentage of the year you spend paying your fair share of taxes.

For the U.S. overall, Tax Freedom Day won't come until this Thursday, April 18, and as we saw yesterday, some states will have to wait quite a while longer before they can declare independence from taxes. But in several states, Tax Freedom Day has already come and gone. Let's look at the six least-taxed states in the U.S., along with a brief explanation of what makes their taxes so much lower than the rest of the country.

6. South Dakota, April 4South Dakota makes the list for a couple of key reasons: It doesn't have an individual income tax, and it doesn't charge businesses on their corporate income, either. The state gets its income from property and sales taxes, but a state sales tax of 4% with local taxes of about 1.8% still doesn't raise the total burden too far. Property taxes average less than $1,150 per person.

4 (tie). New Mexico, April 3Where New Mexico stands out is in low property taxes, with an average of just $633 each year. By comparison, a 4.9% top income-tax rate and a 5.125% sales tax actually bring in a fairly substantial amount of tax, with the state's per-person sales and excise tax liability among the top quarter of states across the nation. Corporate income-tax rates are also fairly high at 7.6%, although the rate is low enough to have enticed chipmaker Intel (NASDAQ: INTC) to move to the area in the early 1980s and gradually expand its production facilities over time.

4 (tie). South Carolina, April 3South Carolina's tax rates don't seem all that attractive, with a 7% maximum individual income-tax rate and a 6% sales tax. But low property taxes of just over $1,000 on average help keep total taxes down, and a relatively small business presence leads to very low corporate-tax revenue.

3. Tennessee, April 2Tennessee's claim to tax fame is that its 6% income tax applies only to interest and dividend income, leaving wages untouched. Property taxes of less than $800 are also extremely low, although a sales tax of 7% helps the state raise needed revenue. A flat corporate-tax rate was probably one incentive that attracted shipping giant FedEx (NYSE: FDX) to locate its headquarters in Memphis.

1 (tie). Mississippi, March 29Mississippi earns high honors on the list with its emphasis on low income and property taxes. The state boasts a top income-tax rate of 5% and property taxes averaging about $850 per person. Mississippi earns much of its revenue from a 7% sales tax, but a low corporate income tax also helps keep the overall burden on the light side.

1 (tie). Louisiana, March 29Louisiana climbs to the top spot by keeping property taxes below $750 and collecting just a 4% sales tax, although local options add nearly 5 percentage points to that figure and make the state one of the highest-collecting sales-tax states. Although extensive activity from energy producers Chesapeake Energy (NYSE: CHK) , Encana (NYSE: ECA) , and Plains Exploration (UNKNOWN: PXP.DL2) in the Haynesville-Bossier shale play could boost incomes and lead to higher taxes, much of Louisiana's sales tax revenue comes from out-of-state tourists visiting the state, leaving the actual amount borne by residents even lower. A 6% income tax isn't enough to push Louisiana out of the top spot.

Living isn't just about taxes As we noted yesterday, It's important to remember that the Tax Foundation's calculations are all based on aggregate measures, and they won't necessarily reflect your personal Tax Freedom Day. But as a general rule, choosing where to live can make a big impact on your total tax liability, and while taxes aren't necessarily the most important factor in making that choice, they definitely deserve at least some consideration.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

@greyhound44, agreed on Louisiana and Mississippi, but Tennessee and South Carolina are both absolutely beautiful states with mild weather and robust economic growth. Knoxville and Nashville are both ranked perennially as among the best places to raise a family, likewise for Columbia and Charleston. As for New Mexico, Albuquerque is also growing tremendously with very high quality of life. Santa Fe is an eclectic heaven and known for its robust alternative lifestyle. South Dakota's biggest drawback is its extreme weather.

Sorry, you missed Alaska - it is a state, not a foreign country. No state sales tax, generally, no local sales tax, no state income tax, the state gives each resident approx. $1000 a year for the oil permanent fund, property taxes are fairly low - approx. 1.6 mils, which for a $500,000 home amounts to about $1500 / yr.

There is definitely something to be learned from at least 3 states on this list about managing infrastructure without crushing the electorate with taxes, but I believe we may also find these states at the bottom of the list for elementary and secondary school test scores, graduation rates and academic scholarship earners to universities outside their respective states. There must be a way to balance that inequity.

I lived in Tennessee for 25 years and I disagree that it is a low tax state. The 6% tax on dividends would really hurt a low income retiree who depended on dividends for a large part of his income. In addition if you include the county tax, the sales tax is one of the highest in the nation (9%) and food is also included. Tennessee is an attractive state but not that great for taxes. Georgia is better because they give a $35,000 exemption for those of us over 65 on state income tax.

@Texasday: I was born, raised and lived half my life in Texas. I've lived in New Mexico for 4 decades now and seen many changes. But, the food, culture, lifestyle and cost of living are very desirable. The weather and the scenery are spectacular. For a slow paced, relaxing and affordable way of life, it's hard to beat New Mexico. As a result, I could never live in Texas again.

Sorry, I'd trade tax money for quality of life any day of the week, and having visited every state listed, South Dakota is probably the only one worth living in. But they, like their northern brothers, do get a high amount of money from their natural ability to produce energy. Mississippi is the worst state in the union, it is a backwater cesspool. Anyone in their right mind that wants their state to turn into Mississippi should be laughed at. Every state has problems, it's not a politics thing, but some are just worse.

I lived in LA for 40 years, and all one can say about that is "you get what you pay for". That state and the others have no interest in education, infrastructures, state improvement, etc. Now, I'm in PA, and I can see where my taxes go and the improvements that are occurring here. So much difference and positive, forward thinking!

There's a benefit from living in low population areas if you can scare up a job. Every state in the union has beauty. I live in a county that has more people than all those states except Tennessee. The infrastructure requirements run the local property taxes to excruciating levels. I would love to move away and I could probably find a job but getting health insurance at my age would probably be prohibitive.

I've lived in Louisiana all my life except while in the military. I'm so glad I got back home. We had no educational problems until the Feds took over in the sixties. This is the most difficult place in the "48" to get rich, but the easiest to survive in hard times. It's all about what one wants to achieve. I love the warm evenings sipping a mint julep in the shade. We preserve the land in order to live off the land, and we do. Go on by rest of the world. It's all good here.

Totally MISLEADING, Yep live in Mississippi and have for many years, and while the Top Tax Rate is 5%, guess what it is on ALL AMOUNTS OVER $10,000 on earned income. So in essence a flat tax. If you are are fortunate to be able to have a decent job and earn a good living, you get smacked with super high amounts on paying State Income Tax to support the other non-nonse hand outs. I am leaving the state for this very reason. Tenn is more favorable, with NO STATE INCOME TAX on wages, still got a lot of years to work, then on have to worry with amount involved with dividend payments. While visiting is nice there are better options.

In 2003, I moved from so-called "tax free" New Hampshire to Tennessee. I immediately realized a property tax reduction from over $5000 to less the $500 for an equivalent home and acreage. Other expenses are also considerably less. I wish I had done this 20 years ago. Southern courtesy and hospitality certainly beats the Puritan outlook on life evident in stodgy New England!

Don't be fooled by what's stated for Tennessee. Although the state doesn't tax personal income, you will pay more for other things. Home insurance, for one. Home insurance in Tipton County is more than double what I pay in another state for a house of almost three times the value. It's much higher in Shelby County.

Sending report...

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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